Author Topic: Buy a house post FIRE. How difficult?  (Read 4092 times)

StockBeard

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Buy a house post FIRE. How difficult?
« on: November 25, 2015, 02:36:32 PM »
We don't own a place yet, and my current plans assume that I'll probably be FIRE'd before we buy a house or a condo.

As I try to crystallize my plans, I realized that getting a loan will not be a possibility if I don't have a job. (This would be in Japan, and they don't lend to unemployed people, independently of your wealth. Also advice such as "go to a local bank" doesn't work easily in this case). So I'd probably have to pay for the place in cash.

In that kind of context, what strategy makes the most sense?

1) Stop investing in stock/bonds right now so I can accumulate (in cash) enough (while I'm still in accumulating phase) to buy a place when the time comes?
or
2) Not worry about it, keep investing, and sell a bunch of stocks (and get taxed on it) when the time comes to buy?

I'll probably have some flexibility regarding "when" to buy, we can rent for 5 years or so...

In other words, if you have a big cash expense ahead of you in the 0~5 years term, what's the best way to get that cash ready?

Playing with Fire UK

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Re: Buy a house post FIRE. How difficult?
« Reply #1 on: November 27, 2015, 01:36:48 AM »
What are the rules if you get a house loan while employed and then FIRE? If this is allowed and the interest is reasonable I would save for the desposit/downpayment while working and then FIRE and pay off the loan with the stash over the years. Or are you working elsewhere and will move to Japan for ER?

Also, would you get the home for a cheaper price if you pay cash?

arebelspy

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Re: Buy a house post FIRE. How difficult?
« Reply #2 on: November 27, 2015, 01:38:58 AM »

What are the rules if you get a house loan while employed and then FIRE?

There's no rules about it. If you qualify for a loan, do whatever you like after*. As long as you're honest when applying for the loan to any questions they ask.


*Some have certain stipulations for owner occupied, like must live there minimum 1-year. None have that, as far as I know, for employment.
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StockBeard

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Re: Buy a house post FIRE. How difficult?
« Reply #3 on: December 15, 2015, 12:02:53 PM »
(First of all sorry for the late follow up, I got sidetracked with real life)

Also, would you get the home for a cheaper price if you pay cash?
This is the essence of my question.

Scenario 1: pay the house in cash
Imagine I manage to save, say $400'000 in cash in the next few years. The full price of my house. I could pay it in cash. Once this is done, my yearly expenses would not include paying a mortage. Imagine yearly expenses of $20'000, tax not included. This is what I'd need to take out of my stash each year, + the money for taxes. Imagine a rate of 33% taxes (for the sake of the example), meaning I'd need to withdraw $30'000 every year to pay $10'000 in taxes and $20'000 for my living expenses.

Scenario 2: take a loan
Alternatively, I would have to take a loan on the house, I pay a minimal deposit, and imagine I have to pay $20'000 a year on the house for 25 years.
My yearly "regular" expenses are still $20'000 a year, and in my imaginary scenario, I still pay 30% of taxes.
So I need to withdraw from my stach: $20'000 for living expenses + $20'000 for the loan + $20'000 for taxes. Total $60'000

Put it simply, when I withdraw money from the loan, I have to pay not only for the loan, but for the taxes incurred by withdrawing money (capital gain) from my stash.

All of a sudden, taking a loan becomes a terrible idea, right? Because to pay the loan (any loan) you have not only to repay the loan + interest, but also additional taxes.

The situation is of course much more complex than what I describe: capital gains are not taxed the same as regular income, and in order to pay for the house in cash it means I need to store that income for several years in a liquid and guaranteed income asset instead of stock, so there's lost opportunity possibly here. Also my stash will be lower and therefore loss of opportunity in the long run.

Summary:
which is best, a guy who has 1 million but needs to take $60'000 out of it every year, or a guy who has $600'000 and needs to take $30'000 out of it every year?

More generically, isn't taking a loan a bad idea when your only income is your stash, given that to pay back the loan you have to withdraw and pay additional capital gain tax?

deborah

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Re: Buy a house post FIRE. How difficult?
« Reply #4 on: December 15, 2015, 02:05:39 PM »
It depends. I have a loan, and I have the money in a bank account, that it gradually gets taken out of (it's a small loan, and this way I have nothing to lose). The money earns more interest than the loan costs, so I am better off. It's the only reason I have the loan. At the end, I will have money in that account. If I had paid it in the beginning, there would be nothing in that account. With the current interest rate situation, this works.

StockBeard

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Re: Buy a house post FIRE. How difficult?
« Reply #5 on: December 15, 2015, 02:10:56 PM »
So I assume you don't pay tax on that account's interest? Or the tax is already factored in? Bank interest - tax > Loan rate ?

deborah

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Re: Buy a house post FIRE. How difficult?
« Reply #6 on: December 15, 2015, 02:12:12 PM »
The tax is factored in.

 

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